Markets Flailing As Bipolar EM Sentiment Lurches From One Extreme To Another

And so following yet another Fed taper, coupled with another disappointing manufacturing data point out of China, emerging markets did their thing first thing this morning and all the most unstable EM currency pairs - the TRY, the RUB, the ZAR and the HUF - all plunged promptly in the process pushing down the USDJPY which as become a natural carry offset to EM troubles, only to rebound promptly. Specifically, USDTRY blew out 400 pips to 2.3010 highs after which it bounced, and has now stabilized around 2.27, well above the Turkish central bank intervention level, USDZAR is back down to 11.2120 after hitting five-year highs of 11.3850, the Ruble also plunged after which it jumped on speculation of Russian central bank intervention, while futures are tracking even the tiniest moves by USDJPY and pushing the Emini which is trading in a liquidity vaccum by a quarter point for ever 2 or pips. And with all news overnight shifting from bad to worse (keep an eye on declining German inflation now) it goes without saying, that EM central banks around the world now are desperately trying to keep their currencies under control: which is why the market's jitteryness is only set to increase from here on out.

Looking at the day ahead, the focus will be on whether there is any more follow through to what we saw yesterday in EM. That aside we have a number of important data releases today starting with the German inflation and unemployment report for January as well as Spanish Q4 GDP. The ECB will publish its Bank Lending Survey. In the US, the advanced estimate of Q4 GDP will be the main focus where the estimate is for an annual QoQ print of 3.2%. Today is one of the busiest days on the corporate reporting calendar with 10% of the S&P500 provide earnings updates, including Exxon Mobil and Google which are the second and third largest companies by market cap.

Market recap from RanSquawk:

Concerns over EM remained at the forefront this morning, with TRY, ZAR bid vs. USD and EUR/HUF at its 2y high, as market participants digested the release of less than impressive macroeconomic data from China, as well as yesterday’s decision by the FOMC to taper QE by USD 10bln. As a result, firmer USD, together with softer inflation data from German states meant that EUR/USD remained under pressure since the EU open. At the same time, worse than expected money supply and mortgage approvals data from the UK, together with touted month-end buying of EUR/GBP weighed on GBP/USD, which trades in close proximity to the 50DMA line. The risk averse sentiment, as well as month-end buying supported Bunds, while USTs continue to underperform as market participants adjust their Fed Fund expectations following yesterday FOMC decision. Going forward, focus turn to the advanced GDP report from the US, 5y and 7y auctions by the US Treasury and earnings by Exxon, Google and 3M.

Overnight headline bulletin from Ran abnd Bloomberg:

Initial weakness in EM currencies was reversed after Russian central bank verbally intervened to support RUB, which filtered through into other EMFX.

Bunds outperformed USTs throughout the session, supported by soft inflation data from Germany, general risk averse tone amid concerns over EM and also touted month-end buying.

The Nikkei 225 index fell over 2% as risk averse sentiment following the FOMC supported the bid tone in JGBs, weaker than expected macroeconomic data from China also weighed on sentiment.

A Chinese Purchasing Managers Index fell to 49.5 from 50.5 in Dec., HSBC Holdings Plc and Markit Economics said in a statement today, the first contraction in six months and below the median 49.6 estimate in a Bloomberg News survey

German unemployment fell by 28k to 2.93m, more than forecast; jobless rate unexpectedly fell to 6.8 percent, unchanged from a revised December figure and matching the lowest rate in at least two decades

New Zealand’s central bank said it intends to start raising borrowing costs “soon” as the economy strengthens. The currency fell as markets had priced in about a 50% chance of a rate increase today

Even as he calls income inequality the “defining challenge of our time,” Obama is pursuing new trade agreements that some of his political allies say will only make the problem worse

Ukraine’s president quashed a demand to unconditionally pardon protesters calling for his resignation, prolonging the country’s political crisis after Russia threatened to withhold aid

Analysts at HSBC said that a soft start to china's manufacturing sectors in 2014 was partly due to weaker new export orders and slower domestic business activities during January. While analysts at Credit Suisse have cut their Chinese Q1 GDP growth target to 7.3% from 7.7%. (RTRS/Credit Suisse)

Fed watcher Hilsenrath said the Fed sets the bar for change in taper plan continuing to reduce bond buying by USD 10bln a month. He added that the Fed does not see recent emerging market turmoil as impediment to tapering. (WSJ)

JP Morgan forecast 10yr US yields at 3.6% by the end of 2014, with the S&P 500 climbing to 2,000. (JP Morgan)Barclays preliminary US Tsys month-end extensions:+0.06y (12m avg. +0.07y)

Equities

Heading into the North American open, stocks in Europe are seen somewhat mixed, with FTSE-MIB and IBEX-35 index outperforming on the back of stocks specific news flow. Overall, risk averse sentiment following yesterday's FOMC decision and concerns over further capital flight from EM weighed on investor appetite for stocks. Of note, German listed fertilizer manufacturer K+S shares fell 2.7% after Potash Corp, the world's largest potash producer, gave downbeat guidance for the next quarter.

HSBC shares were temporarily halted, with the spike higher of almost 10% being attributed to a fat finger trade, before resuming trade.

FX

EUR came under broad based selling pressure amid a firmer USD and also softer than expected German states CPI, which raised prospect of further policy easing by the ECB. In turn this resulted in bull flattening of the Euribor curve, with EONIA 1y1y rate also underpressure. Elsewhere, lower than expected M4 money supply, which also marked its the biggest decline for 17 years and second biggest in the last 30 years, together with touted month-end buying of EUR/GBP by EU sovereign name weighed on GBP/USD.

In EM space, EMFX reversed initial weakness after Russian central bank verbally intervened to support RUB. However earlier in the session, EUR/HUF traded at its highest level in over 2y, while USD/TRY traded pre interest rate hike levels. RBNZ kept the Official Cash Rate (OCR) unchanged at 2.50% as expected, however NZD/USD fell as there were outside bets of a rate hike (3/15 analysts) (BBG)

China gold demand seen resilient in 2014 and imports seen above 1,300 tons in 2013, according to CNC's Na Liu. (BBG)

Japanese copper and brass output will cross 800,000 tonnes in 2014, according to the JCBA. (MetalBulletin)

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We conclude as always with Jim Reid's overnight recap

Emerging market jitters returned in force yesterday, with a $10bn Fed taper and a disappointing Chinese HSBC PMI merely adding to the gloom. Overnight the final Chinese HSBC manufacturing PMI for January printed at 49.5, confirming the first sub-50.0 reading in seven months. Recall that the preliminary reading was 49.6 and much of the sequential drop was blamed on a government clampdown on polluting industries during the winter months and an emphasis on anti-corruption efforts in the lead up to the Lunar New Year. Already a couple of banks have downgraded their Q1 Chinese GDP estimates in response to the PMI and it seems that the market sentiment on Chinese growth has yet to find a bottom despite some recent better news on the country’s shadow banking system. The official Chinese PMI reading is due early on Saturday morning (London Time) and the expectation there is for the index to fall to 50.5 from 51.0 in December, which would also be the lowest print in seven months.

Following yesterday’s EM performance, Asian assets are once again being sold off overnight across credit, FX and equities. Losses in equities are being led by the Nikkei (-2.8%) which broke through the 15,000 level. Japanese exporters are underperforming on the back of USDJPY losing another 0.1% overnight following a 0.6% drop on Wednesday. Asian equities touched a session low shortly after the release of the Chinese PMI but the reaction to the data itself was only mildly negative. In credit, the high beta sovereigns including Indonesia have seen their CDS widen by 16bp and Asian IG spreads are about 5-6bp wider on the day. Asian EMFX bellwethers such as the Indonesian rupiah (-0.4%), Korean won (-1%) and Malaysian ringgit (-0.3%) are all struggling against the dollar – though these moves pale in comparison the ones we’ve witnessed in other EM jurisdictions such as in LATAM in recent days. AUDUSD fell about a quarter of a percent post-PMI but has pared back most of those losses. Much of Asia shuts down for the week today for Lunar New Year celebrations and will only begin to gradually from Tuesday next week.

Bernanke’s final FOMC ended on a rather quiet note and there were no real surprises in terms of policy or the Fed’s post-FOMC statement. The reaction to policy statement was fairly subdued with 10yr UST yields ticking down slightly (-7bp on the day at 2.67%) while US credit & equities continued to pull back. In terms of the FOMC itself, DB’s Peter Hooper summed it up succinctly by saying that the FOMC sounded slightly more upbeat about recent economic news, tapered another $10 bn on schedule, left thresholds untouched, and there were no dissents. They acknowledged the stronger pace of growth in H2 last year (specifically in household and business spending), but also observed the mixed picture in labor markets (an allusion to the weak payroll number in December). The FOMC statement did not specifically mention the recent volatility in EM.

The risk reversal that began early in the European session took many by surprise, and investors began questioning whether the hikes from the CBRT and SARB would improve or worsen the growth/inflation dynamic. The ruble (-0.7%), which has now depreciated for 13 straight days, weakened to a five year low thanks in part to Russian Finance Minister Siluanov’s comment that “Russia should not follow the suit of some emerging markets in an attempt to slow rapid depreciation of their currencies”. Following a 6% intraday peak to trough depreciation in the TRY, Turkey’s PM Erdogan said he would give some time for recent rate hikes to succeed before potentially trying alternative measures that he said are ready to be deployed. Erdogan said the government may announce its “Plan B” in a few weeks but didn’t offer much detail on what it entailed. DM credit traded in a massive range yesterday, with the European iTraxx printing as low as 76bp in the morning, and as wide as 85bp in the afternoon for an intraday range of 9bp. The S&P500 (-1.0%) traded down to its 100 day moving average for the fourth time since June 2013.

There was some positive news flow amongst the doom and gloom. A comfortable earnings and revenue beat from Dow Chemical saw the stock rise 3.8% and the chemical sector proved to be one of the only sectors which traded firmer yesterday. The company reported robust demand for its agricultural products and its plastics division appeared to benefit from the abundant supply of gas in North America. The only other sector to trade in positive territory was gold mining (+0.85%), thanks to a 0.84% increase in the gold price as markets sought safe havens. Facebook’s earnings-beat saw the stock trade up almost 12% in extended hours trading. The jump in advertising revenues was quite large (+63%) and the company seemed to convince many that its transition to mobile was progressing well with the majority of advertising revenue in the quarter coming from mobile.

With Bernanke’s final day at the Fed tomorrow, and a number of media outlets publishing a review of Bernanke’s time at the helm, there was an interesting poll published by Gallup that suggested that public opinion was divided on Bernanke’s time as Fed Chairman. The poll, which was conducted on January 25th to 26th, showed that the percentage of respondents approving of Bernanke’s chairmanship was 40%, which is 25 percentage points lower than Alan Greenspan’s approval rating in a similar Gallup poll conducted in Jan2006 in the final days of Greenspan’s tenure. The poll also showed that Bernanke’s disapproval rating of 35% is 14 percentage points higher than that of Greenspan’s 21%. Perhaps it’s unsurprising, but the majority of Republicans respondents disapproved of Bernanke’s Chairmanship (53%) while only 19% of Democrats felt the same way. In terms of income, those with an annual household income of $90,000 or higher showed the greatest approval rating for Bernanke (54%) versus only 34% of households with income less than $24,000.

It’s also worth highlighting that the percentage of respondents with “no opinion” of Bernanke’s tenure was as high as one-in-four (25%) which is 11 percentage points higher than those with no opinion in Greenspan’s poll (14%) – this is despite Bernanke’s Chairmanship spanning the turbulent years of the global financial crisis, the introduction of ZIRP and the subsequent years of QE.

Looking at the day ahead, the focus will be on whether there is any more follow through to what we saw yesterday in EM. That aside we have a number of important data releases today starting with the German inflation and unemployment report for January as well as Spanish Q4 GDP. The ECB will publish its Bank Lending Survey. In the US, the advanced estimate of Q4 GDP will be the main focus where the estimate is for an annual QoQ print of 3.2% (DB is top of the market at 4.0%). Today is one of the busiest days on the corporate reporting calendar with 10% of the S&P500 provide earnings updates, including Exxon Mobil and Google which are the second and third largest companies by market cap.

When all is F****d up, divert attention or start a a war. Oh, and monkey smack Gold because there is no more supply. It's such a joke and, I would have thought, fairly transparently a joke by now to anyone with any IQ?

Yup. And Emerging markets are actually PRODUCING things. Shock and horror!! When TSHTF the truth will out and "The Empreror, ie The US" will be exposed as having no clothes.

The fact is, largely as a result of "Offshoring and Globalisation" as a policy choice by the West, the EM' economies are GROWING. The fact that they may have nobody to SELL to is a natural, but unforseen, consequeence of the NWO??

Most investors think that even if things go downhill fast that they will be smart enough to get out of the markets. After the debacle in 2008 where they saw the market do nasty and violent swings they learned a few things, this time they figure they will make the right moves before it is to late. But what if it hits like the flash crash on steroids? We know that can't happen because circuit breakers have been put in place to arrest panic style moves, but imagine a market that falls, trade is halted, and the market simply does not reopen for days, or even weeks. Below is a scenario on how this might happen.